In the last decade of the twentieth century developed countries gave some US$ 50-60 billions worth of foreign assistance to developing countries every year. Yet the level of real per capita income in many developing countries has not risen at all. In fact, in some regions such as Africa the level of income is lower today than it was thirty years ago. So why does poverty persist after so many billions of dollars of aid and should developed countries continue to provide aid? Both politicians and academics hotly debate these questions. On the one side, individuals like Jesse Helms, Chairman of the U.S. Senate Foreign Relations Committee, damn aid by declaring that it is "money down foreign rat holes." This side argues that, fundamentally, aid cannot do any good, or that it takes too much of the federal budget at a time of growing unmet needs at home. The other side maintains that aid has not been properly targeted to reduce poverty or promote economic growth in developing countries that need it most. For example, they point to how donors have been giving aid to sustain their post-colonial relations and how Cold War rivalry led to use of aid as a strategic policy instrument.

The end of the Cold War brought hope that aid would be better targeted to alleviate world poverty and foster economic growth in developing countries. However, the end of the Cold War left many 'orphans' on both sides - countries that used to be rewarded for their loyalty as clients of the East or West, whose allegiance were no longer needed. However, political reasons continue to dominate disbursement of aid. Roughly two-thirds of the world's poorest people receive only one-third of all aid. For example, Egypt and Israel, both wealthier countries than almost every country in Africa, continue to receive the lion's share of U.S. foreign assistance for strategic reasons.

The problem does not appear to be just the distribution of aid, but also insufficient levels of aid. In addressing the UN General Assembly forty years ago, John F. Kennedy proposed that the industrial nations make the 1960s the "Decade of Development" and pledged 1% of his country's GNP to the effort. Nothing came of that speech or of Kennedy's vision that "a more prosperous world would also be a more secure world." Following a report by the Pearson Commission in 1969, the UN set its target for aid at 0.7% of a donor country's GNP. However, very few countries have ever met or exceeded this figure (notable exceptions are Denmark, the Netherlands, Norway, and Sweden). Canada and U.S. have never even approached the 0.7% target. The average donor country effort stands at 0.4%.

My own research in this subject demonstrates that there are good reasons to believe that giving foreign aid triggers exports for a donor. Exports are generated not only because some types of aid are tied (e.g., are made conditional on the recipient country purchasing the donor country's goods and services), but also because giving even untied (unconditional) aid generates some 'goodwill' for a donor in the recipient country. In studying Canadian and German aid, I have provided some evidence that giving any aid, including untied aid, increases donor exports to developing countries thus supporting the 'goodwill' hypothesis. I have also shown that untied aid has a lingering (i.e., long lasting) positive effect on these donors' exports. That is, untied aid has a cumulative as well as a contemporaneous positive impact on donor exports. In another study I have demonstrated that it is in the interest of OECD countries to provide and maintain a constant level of untied aid in order to promote their trade with the Third World. The overall message is simple: the cost of giving aid, even in an untied form, is less than what the public thinks, since aid generates positive returns for a donor.

How about the question of distribution? Recent research by the World Bank has shown that aid has a positive impact on growth in developing countries, but only in the right place, i.e. only in those countries with good fiscal, monetary, and trade policies. In other words, for aid to be effective, the governance and institutional environment in the recipient country have to be right. It then follows that if all donors abandon pursuit of their political interests and allocate aid in a more effective fashion, aid does have the potential to do some good. But the hard question is how can we, as donors, bring about the right environment?

Another tough question is this. One of the fundamental aims of foreign assistance is to stimulate economic growth in developing countries and therefore reduce their future need for aid. Another aim is poverty reduction. Generally speaking, these two aims go hand-in-hand. But what if aid reduces poverty without affecting growth in a positive significant way? What if aid generates growth without alleviating poverty? What is certain is that debate on both political and economic fronts will continue on this subject.

Dr. Mak Arvin is professor of economics at Trent University. His current research focuses on whether aid can promote democracy in developing countries. His forthcoming book entitled Allocation of Foreign Aid and Economic Development: New Theoretical and Empirical Perspectives will be published in early 2002 by Praeger.